The Balancing Act is of All the Essence at Letshego

“We don’t necessarily increase rates as reference rates are increased,” says Gwen Muteiwa, the Chief Finance Officer (CFO) of Letshego Holdings, responding to a question from Antwi Kwanena, the Portfolio Manager at Kgori Capital, this week. “Our customers want some level of predictability in terms of instalments,” Muteiwa continued to wrestle with the question which sought to establish how the lender passed its cost of funds to customers. The query from Kwabena Antwi, Portfolio Manager at Kgori Capital was motivated by the elevated interest expense which the CFO had in her presentation said the company experienced particularly during the first half of 2022. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] Central banks the world over have been fighting supply-induced inflation by increasing interest rates which have been climbing over the last six months of Letshego’s reporting period. As a matter of fact, all reference rates have gone up in all of Letshego’s markets, with Ghana and Mozambique showing steep increases of interest rates. Ghana has raised the reference rate by 300 basis points in the last two weeks, the biggest margin since 2002. This year alone, the West African country raised rates by 800 basis points. “We don’t necessarily pass on at the point where our cost of funds goes up,” Muteiwa said, adding that only if a customer comes with the intention of topping up a loan may the company pass “on some proportion of those increases to customers”. She was eager to emphasise that it is not immediately at the point when a central bank increases reference rates or when funders demand high interest rates. During the first half of 2022, Letshego’s interest expense increased by 39 percent year-on-year to P682 million, impeding the Group’s profitability trajectory. Profit before tax declined 18 percent year-on-year to P446 million (H1 2021: P544 million) with profit after tax reducing 21 percent year-on-year to P248 million (H1 2021: P314 million). Interest expense has elevated due to economic headwinds, central bank interventions and the Group’s current comparative scale in retail deposits, the Group explained. Net Interest Income declined by 4 percent compared to the prior period on the back of increased reference rates by most central banks, for which, because of the company’s deduction at source primary business, it does not adjust its lending rates. Muteiwa explained that the group had anticipated that it would have margin compression as a business. “Our customers are very sensitive to rate increases and what they want is if my instalment is P100 this month, it must be P100 throughout,” she said. In combating the high interest expense environment, the CFO said the Group is retiring expensive deposits, substituting short-dated funding with long-dated funding and managing drawdowns. Letshego closed the period with cash and cash equivalents of P1.3 billion which the CFO said includes some investments, money market placements, and treasury bills used to hedge or secure funding for lending. According to the Group, about 32 percent of this constituted government bonds and treasury bills used to secure local currency funding on the back of foreign denominated instruments. Muteiwa said Letshego is trying to optimally use that cash and cash equivalents to make sure it doesn’t become idle cash but helps reduce interest expense. What Letshego has also been doing is to aggressively push deposits with particular focus on retail deposits. Over the last couple of years, the Group initiated talks about how it needed to increase the deposits to reduce cost of funds. Against this background, Letshego said institutional deposits were now coming down and that as funders want higher interest rates, they are retiring them to reduce cost of funds. Total deposits increased by 18 percent to P1.164 billion (H1 2021: P989 million) with the retail deposit proportion growing by 57 percent year-on-year to P587 million (constituting 50 percent of total deposits compared to H1 2021 where retail deposits constituted 37 percent of the total deposit portfolio). The mobilisation of small retail deposits in the mass and middle customer segments grew the number of retail customers by 16 percent year-on-year. The Group disclosed that first half cost of deposits reduced by 200 basis points, driven by the retail customer segment and disclosed that the second half will see the conclusion and launch of Digital Flexi savings accounts, commencing with Namibia and Ghana. This is expected to strengthen the Group’s customer value proposition on the LetsGo Digital Mall. “Retail deposits are cheaper,” said Muteiwa. “The strategy to reduce interest expense is to retire expensive deposits and grow retail deposits.” Most deposits come from Ghana, Mozambique and Namibia as key markets. In a rising interest rate environment, the CFO also said they are also trying to secure more fixed rate funding so that they don’t experience the shocks associated with interest rates increasing frequently. “This is to ensure we do not have more margin compression and reduce the margin risk,” said Muteiwa. “We are exposed to repricing from our floating facilities.” Letshego’s mix of fixed vs floating sits at 52 percent for fixed facilities and 48 percent for floating. In light of the increasing interest rate regime, the Group made every effort to secure fixed rate funding to curb fluctuations in cost of funds. The company’s fixed or indexed interest debt profile increased to P4.6 billion (H1 2021: P2.3 billion) while the variable interest rate debt profile decreased marginally to P4.4 billion (H1 2021: P4.5 billion). The Group actively drew fixed rate funding, and in some instances, hedged floating rate facilities to fixed rate using cross currency swaps. Overall, cost of funds increased by 60 basis points in the reporting period, driven by these macro-economic factors. “We continue to work with our funders to see where we can get fixed funding and also to increase turners as well,” Muteiwa said, adding that the Group also continues to manage foreign exchange risk by looking for a mix of local funding versus hard currency funding. Subsidiaries are also raising funding locally from banks in their markets so as to reduce risk of foreign exchange markets. Ghana took a huge knock when its currency plummeted by nearly 44 percent against the pula. As at 30 June 2022, Letshego shows that wholesale bank funding makes up 45 of the group’s total funding portfolio (FY2021:39 percent) while Development Finance Institution (DFIs) funding constitutes 23 percent of the Group’s total funding portfolio (FY2021: 25 percent). Bonds constitute 18 percent of total funding (FY2021: 23 percent). The Group revealed that it matured its bonds on the Johannesburg Stock Exchange, with Namibia now raising its own funding through the local bond market. Namibia’s note programme increased by 108 percent to P289 million (H1 2021: P139million). According to Muteiwa, the increase in Namibia’s borrowing is to repay more expensive intercompany borrowings and thereby reduce cost of funds. Ghana also issues a corporate bond on the market and has been increasing funding to support loan book growth. Debt to equity ratio is sitting at 141 percent, which Muteiwa said the Group is “pretty comfortable” with. With the increase in debt, she reiterated that “we are trying to substitute some of our borrowings, paying off overdrafts and getting into longer dated funding”. Although it is more substitutions than increase in debt, Muteiwa said the maximum (debt to equity) “we can get to is 165 percent”. The Group’s CEO, Aupa Monyatsi, pointed out that Letshego is also working towards improving its non-funded income (NFI) and will start to see a lot more of it in the second half. During the first half, the Group hastened to build its platform and list digital products. Monyatsi said this gives them an opportunity to start seeing NFI growing. “It acts as a shock absorber to interest income which is exposed to the market,” he said. “You will start to see a much more balanced revenue stream between interest income and non-funded income.” NFI currently sits at 15 percent of total income. Responding to Kwabena’s question, Muteiwa said the target is 20 percent by 2025. “That will come through in the form of additional insurance arrangements, transactional business in the mall.” [/ihc-hide-content]

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The Balancing Act is of All the Essence at Letshego

Wholesale bank funding from local sources, development finance institutions and bond markets are all in the mix at Letshego as the pan-African micro-lender focuses on minimising cost of funds for its customers across the continent. Staff Writer KITSO DICKSON reports

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The Balancing Act is of All the Essence at Letshego

Wholesale bank funding from local sources, development finance institutions and bond markets are all in the mix at Letshego as the pan-African micro-lender focuses on minimising cost of funds for its customers across the continent. Staff Writer KITSO DICKSON reports

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